Central Water District Associates, Limited Partnership v. Commissioner of Revenue (October 9, 2008)

COMMONWEALTH OF MASSACHUSETTS

APPELLATE TAX BOARD


CENTRAL WATER DISTRICT ASSOCIATES, LIMITED PARTNERSHIP             
	v.	COMMISSIONER OF REVENUE	
Docket No. C282385
		Promulgated: October 9, 2008 	

This is an appeal filed under the formal procedure pursuant to G.L. c. 58A, § 7 and G.L. c. 62C, § 39 from the refusal of the Commissioner of Revenue ("Commissioner" or "appellee") to abate failure to file penalties assessed to the appellant under G.L. c. 62C, § 34, and related interest, for the tax periods beginning January 1, 1979 and ending December 31, 2001 ("tax years at issue").  
Commissioner Rose heard the appeal and Chairman Hammond and Commissioners Scharaffa, Egan, and Mulhern joined him in the decision for the appellant.
These findings of fact and report are made pursuant to a timely request by the appellant under G.L. c. 58A, § 13 and 831 CMR 1.32.

	Roger J. Brunelle, Esq. for the appellant.

	Andrew M. Zaikis, Esq. for the appellee.



FINDINGS OF FACT AND REPORT

Central Water District Associates ("CWDA" or "appellant") was a Massachusetts limited partnership formed in 1979.  Between 1979 and 2001, the appellant did not file Massachusetts partnership tax returns. After conducting an audit for the tax years at issue, the Commissioner issued a Notice of Failure to File partnership tax returns to the appellant on December 10, 2002. On March 23, 2003, the Commissioner issued a Notice of Intent to Assess non-filing penalties in the amount of $503,645 for the tax years at issue.  The appellant requested and received a pre-assessment conference with the Commissioner, and that hearing was held on July 22, 2003.  By Notice of Assessment dated October 28, 2003, the Commissioner assessed $505,931.79 in penalties and interest.
The appellant subsequently filed a Massachusetts Form 3 partnership return and a Form CA-6 Application for Abatement for each of the tax years at issue.  The Commissioner denied the appellant's abatement applications by Notice of Abatement Determination dated June 17, 2005.  The appellant timely filed a Petition Under the Formal Procedure with the Board on August 15, 2005, appealing the Commissioner's denial of its abatement applications.  On the basis of these facts, the Appellate Tax Board ("Board") found that it had jurisdiction to hear and decide this appeal.  On the basis of the testimony and exhibits entered into evidence in the hearing of this appeal, the Board made the following findings of fact.  
In January 1977, Raymond E. Shea, Sr. ("Shea Sr.") purchased property consisting of a factory building and land located at 1030 Stafford Street in Leicester, Massachusetts, along with the water rights appurtenant to the land ("factory building"). Simultaneously, Shea Sr. obtained title to three bodies of water known respectively as Stiles Lake, Cedar Meadow Lake and Burncoat Pond ("water properties").  On or about March 21, 1977, Shea Sr. incorporated a Massachusetts corporation known as Central Water District Company ("CWDC").  Shea Sr. then conveyed the factory building and water properties to CWDC for the consideration of $1.  
CWDA was officially created on December 12, 1979 when Shea Sr. filed a Limited Partnership Agreement ("agreement") with the Secretary of State of the Commonwealth.  Shea Sr. was the sole General Partner of CWDA, holding a 30% interest in the company.  On December 24, 1979, CWDC conveyed the water properties to CWDA for the consideration of $1.  In October of 1994, Shea Sr. transferred his interest in CWDA to his son, Raymond E. Shea, Jr., ("Shea Jr."), who thereafter was the sole general partner of CWDA.  Shea Sr. died in June of 2000.  
The appellant appealed from the Commissioner's denial of its application for the abatement of the five dollar-per-day penalty imposed for failing to file partnership tax returns under G.L. c. 62C, § 34.  In support of its contention that its failure to file partnership tax returns was the result of reasonable cause, the appellant claimed that it relied on the advice of Mr. Joseph A. Simoncini, Jr., ("Mr. Simoncini") an accountant and tax return preparer with whom Shea Sr. was acquainted for at least 40 years.  The appellant argued that Mr. Simoncini advised that it need not file Massachusetts partnership returns, and that its reliance on Mr. Simoncini's advice constituted reasonable cause for its failure to file partnership returns for each of the tax years at issue.  Mr. Simoncini and Shea Jr. both testified at the hearing of this appeal regarding Mr. Simoncini's communications with Shea Sr. and Shea Jr. concerning the appellant's need or lack of need to file tax returns.  
According to Mr. Simoncini, Shea Sr. was a client of his for approximately four decades.  Mr. Simoncini testified that he primarily prepared personal income tax returns for Shea Sr. and that he exclusively prepared personal income tax returns for Shea Jr.  Mr. Simoncini testified that on a few occasions he did prepare tax returns for Shea Sr.'s businesses.  
Mr. Simoncini testified that sometime in the late 1970s, he had a conversation with Shea Sr. in which Shea Sr. informed him that he had purchased some water properties with a group of associates, and he inquired of Mr. Simoncini as to whether the group would need to file tax returns for this business.  Mr. Simoncini testified that he informed Shea Sr. that if the group owned no buildings and had no income, then it did not need to file a tax return until such time as it disposed of its property, at which time it would report either a gain or a loss.  Mr. Simoncini further testified that he advised Shea Sr. to simply keep a record of the group's expenses, and "deal with it when they sell the property."  Mr. Simoncini also testified that at the time of his conversation with Shea Sr., he did not understand the "group of associates" referred to by Shea Sr. to be an actual limited partnership, nor was he presented with any documentation regarding the group's finances or status as a limited partnership.  Mr. Simoncini did not bill Shea Sr. or CWDA for his advice or otherwise document the conversation.  
According to both Mr. Simoncini and Shea Jr., Mr. Simoncini's next involvement with appellant came in approximately 1995, at which time the two men had a conversation.  Shea Jr. informed Mr. Simoncini that he had assumed his father's interest in CWDA.  Shea Jr. informed Mr. Simoncini that one of the water properties, Stiles Lake, had been taken by eminent domain, an action which the appellant challenged in court.  Shea Jr. informed Mr. Simoncini that as a result of the taking, the appellant was awarded a sum of money which was placed into escrow pending the outcome of the court case.  Shea Jr. asked for Mr. Simoncini's advice regarding the tax implications of the taking of Stiles Lake.  According to the testimony of both men, Mr. Simoncini indicated that if the group had no income and no buildings, it did not need to file tax returns.  
The appellant's interest in Cedar Meadow Lake was taken by eminent domain on May 30, 1997, an action which CWDA also challenged.  As a result of the taking, the appellant received approximately $48,356.42.  Once again, Shea Jr. sought the advice of Mr. Simoncini regarding the potential tax implications of the taking.  This conversation occurred sometime in 1998.  Shea Jr. testified that he informed Mr. Simoncini that the appellant's expenses far exceeded the amount of money it received for the taking.  At that time, Mr. Simoncini advised that if the appellant's expenses were in excess of the amount of money received, then CWDA could treat the payment as a deposit on a sale, and CWDA would not be obligated to file tax returns until the eminent domain proceedings had concluded.  Again, Mr. Simoncini was not aware that the appellant was a limited partnership, nor was he presented with any documentation regarding the appellant's finances.  Mr. Simoncini did not bill Shea Jr. or CWDA for his advice, and neither Shea Jr. nor Mr. Simoncini documented their conversations.  
In addition to his trial testimony, two affidavits detailing Mr. Simoncini's interactions with Shea Sr. and Shea Jr. were entered into evidence in this appeal.  One of the affidavits contained statements largely consistent with Mr. Simoncini's hearing testimony that he advised Shea Sr. and Shea Jr. that the appellant need not file partnership tax returns.  However, the other affidavit, signed under penalties of perjury by Mr. Simoncini, contained the following statement: "I have never advised either Raymond E. Shea, Sr. or Raymond E. Shea, Jr. on the specific issue of whether or not this partnership [CWDA] was required to file partnership tax returns with the Department of Revenue for the Commonwealth of Massachusetts."  While this sworn statement seemed to contradict Mr. Simoncini's hearing testimony and the statements contained in the other affidavit, Mr. Simoncini explained the apparent discrepancy by clarifying that he was never specific in his advice as to Massachusetts partnership returns, rather, the advice he gave to Shea Sr. and Shea Jr. related to the need to file tax returns in general.  
Shea Jr. testified that when he became general partner in 1994, the records of the partnership were "very informal," and consisted of a single sheet of paper recording money loaned out and certain expenses, such as real estate taxes paid.  Shea Jr. also testified that, at the time he became general partner, the partnership's records concerning the capital contributions of the limited partners were limited to just "one entry" made on "one particular date and time."  However, upon assuming his father's interest, Shea Jr. testified that he took no steps to enhance the partnership's record-keeping practices.  During their conversations about CWDA, Shea Jr. did not provide Mr. Simoncini with any records or documentation concerning the partnership's finances or its legal status as a limited partnership.    
The Commissioner presented the testimony of just one witness, Peter Kortkamp, whom the Board found to be credible.  Mr. Kortkamp testified that he is currently an attorney in the private practice of law, but at one time worked as an attorney for the Department of Revenue. During his employment at the Department of Revenue, Mr. Kortkamp was involved in an investigation of Shea Sr. during the late 1990s, and as part of that investigation, issued administrative summons for the records of various business entities, including the records of the appellant.  Shea Jr. also testified regarding Mr. Kortkamp's investigation in the late 1990s, and testified that he personally appeared before Mr. Kortkamp and gave sworn testimony in a deposition in connection with that investigation.  Mr. Kortkamp testified that he had never met Shea Jr. personally and did not take his deposition.  
Based on all of the evidence, the Board found that CWDA did not exercise the ordinary business care and prudence necessary to establish that its failure to file tax returns was due to good and sufficient cause.  The Board found that CWDA did not exercise ordinary business care and prudence in its record-keeping practices, nor in its extremely sporadic and infrequent consultations with Mr. Simoncini.  Shea Jr. and Shea Sr.'s consultations with Mr. Simoncini, which consisted of three brief, undocumented conversations over nearly two decades, did not provide CWDA with good and sufficient cause for its failure to file partnership tax returns for the 23 consecutive tax years at issue.											In addition, the Board found that Mr. Simoncini was not furnished with all of the relevant information at the time his advice was sought, including such basic information as the fact that CWDA existed and was in fact a limited partnership.  Because the appellant did not furnish Mr. Simoncini with the documentation and facts necessary to offer accurate advice, it failed to exercise ordinary business care and prudence.  
Moreover, much of the evidence offered by the appellant consisted of the testimony of Shea Jr., whose   testimony was directly contradicted by the Commissioner's witness, Peter Kortkamp.  Accordingly, the Board found that the testimony presented by the appellant was not reliable.  The Board therefore found that the appellant did not establish that its failure to file was the result of good and sufficient cause.  
The Board found and ruled, however, that the Commissioner was prohibited from imposing interest on unpaid penalties imposed under G.L. c. 62C, § 34.  As explained more fully in the following opinion, the Board granted the abatement of $4,644.98 in interest but otherwise upheld the imposition of penalties.  

  	 OPINION
	"Every partnership, other than a corporate trust as defined in chapter sixty-two, having a usual place of business in the commonwealth shall file, on or before the fifteenth day of the fourth month following the close of each taxable year, an information return sworn to by a member of the partnership."  G.L. c. 62C, § 7.  "If any partnership required to file a return under section seven fails to file the return within the time therein provided, it shall become liable to a penalty of five dollars for every day during which it is in default."  G.L. c. 62C, § 34.  "For good and sufficient cause such penalty may be waived by the commissioner, or a penalty which has been assessed may be abated by the commissioner in whole or in part."  Id.  									There is no dispute that the appellant had an obligation to file a partnership tax return under G.L. c. 62C, § 7 for each of the tax years at issue, and that it failed to do so.  Thus, the determinative issue in this appeal is whether the appellant's alleged reliance on Mr. Simoncini's erroneous advice that it did not need to file such returns constituted good and sufficient cause.  
Neither party cited case law or other authority on the issue of what constitutes "good and sufficient cause," and the Board is aware of no such authority.  In 1980, the Legislature amended G.L. c. 62C, § 33(f) by replacing the "good and sufficient cause" standard with the "reasonable cause" standard which is used in Internal Revenue Code ("I.R.C.") § 6651(a).  St. 1980, c. 27, § 10.  The "good and sufficient" verbiage in § 34 remained unchanged.  The Board rules, however, that both standards were intended to focus on whether the taxpayer's conduct was reasonable.  Accordingly, the Board, like both parties, based its analysis on the analogous "reasonable cause" standard set forth in § 33(f).  
To establish that a failure to file was the result of reasonable cause, "at a minimum the taxpayer must show that he exercised the degree of care that an ordinary taxpayer in his position would have exercised." Commissioner of Revenue v. Wells Yachts South, Inc., 406 Mass 661, 665 (1990).  In making determinations regarding reasonable cause, Massachusetts courts and the Board have looked to federal interpretation of I.R.C. § 6651(a), the federal counterpart to § 33(f), for guidance.   
	Reasonable cause may be found when a taxpayer has relied on substantive tax advice given by a competent tax professional, provided, however, that the taxpayer still exercises "ordinary business care and prudence." Boyle, 469 U.S. at 251.  A taxpayer exercises "ordinary business care and prudence" when he selects a competent tax professional to provide an opinion on a tax matter, makes all relevant facts and papers available to him, and then relies on his opinion with respect to the tax matter in question. See Rohrabaugh v. U.S., 611 F.2d 211 (7th Cir. 1979); Haywood Lumber & Mining Co. v. Commissioner, 178 F.2d 769, 771 (2nd Cir. 1950).  
	To establish that it exercised ordinary business care and prudence, a taxpayer must "establish that the professional advisor on whom [it] relied had the expertise and knowledge of the relevant facts to provide informed advice on the subject matter." Freytag v. Commissioner, 89 T.C. 849, 888 (1987).  Neither Shea Sr. nor Shea Jr. provided Mr. Simoncini with the documentation necessary to determine CWDA's filing obligations.  In the initial meeting between Shea Sr. and Mr. Simoncini, Shea Sr. failed to provide a copy of the partnership agreement, the property deeds, the capital account records or any other financial records of the partnership, nor did he inform him that CWDA was in fact a limited partnership.  
Shea Jr. similarly failed to provide to Mr. Simoncini with records of CWDA's status as a limited partnership or any other relevant records, to the extent that CWDA even maintained them.  The Board found that CWDA's "very informal" records, which totaled a single sheet of paper after more than two decades of operation, were not indicative of a business which exercised ordinary business care and prudence.  
The appellant relied almost exclusively on Samia v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 1993-127, a case in which the Board awarded the full abatement of penalties incurred by a taxpayer for failure to file timely returns. In Samia, the Board found that the taxpayer made, or in good faith attempted to make, full disclosure of all of the relevant information and documentation to its tax advisor, and that the tax advisor's advice was related to the specific tax matter at issue. Id. at 133-34.  The facts of the instant appeal are quite distinguishable. In the instant appeal, CWDA did not make available, nor even attempt to make available, the information necessary for Mr. Simoncini to offer sound tax advice.  Nor, apparently, could it have, as its own record-keeping practices were so minimal and informal that Mr. Simoncini may not even have been able to ascertain the partnership's tax obligations.  
Moreover, in Samia, the tax advisor provided written opinion letters to the taxpayer, evidencing the specific advice given.  Id. at 137.  In the instant appeal, neither Shea Sr. nor Shea Jr. documented the advice given to them by Mr. Simoncini, nor were they billed for his advice.  Mr. Simoncini similarly failed to memorialize their conversations in any way, and did not bill the appellant, Shea Sr. or Shea Jr. for his services.  
Finally, even assuming arguendo that Shea Jr.'s purported reliance on Mr. Simoncini's erroneous advice was an adequate basis for the abatement of the penalties at issue, the Board placed little weight on Shea Jr.'s testimony because it was contradicted by the evidence of record.  Shea Jr.'s testimony that he had been deposed under oath by Peter Kortkamp was directly contradicted by the testimony of Mr. Kortkamp.   Mr. Kortkamp testified that he had never taken the deposition of Shea Jr. or met him personally, and the Board found Mr. Kortkamp to be credible.  Therefore, given that much of the evidence presented by the appellant consisted of the testimony of Shea Jr., the Board found that the appellant's evidence was insufficient to overcome its burden of proof in this appeal.
On the basis of the evidence presented, the Board found and ruled that the appellant failed to meet its burden of proving that it exercised ordinary business care and prudence. The Board therefore found that the appellant's failure to file partnership tax returns was not the due to good and sufficient cause, and accordingly found that the Commissioner did not err in refusing to abate the penalties at issue.  
The Board found, however, that the Commissioner improperly imposed interest on the appellant's unpaid penalties.  Following Molesworth v. Commissioner of Revenue, 408 Mass. 580-581 (1990), the Legislature amended G.L. c. 62C, § 32 to allow for the imposition of interest on unpaid penalties imposed under G.L. c. 62C, § 33.  However, the penalties imposed in the instant appeal were imposed under G.L. c. 62C, § 34, and the Legislature has not provided for the imposition of interest on penalties imposed under that section.  As a result of the Board's Order under 831 C.M.R. 1.33, the parties agreed that an abatement of $4,644.98 was due to the appellant for the interest imposed on the unpaid penalties.  Accordingly, the Board ordered an abatement of $4,644.98, but otherwise upheld the imposition of penalties.      

				    THE APPELLATE TAX BOARD

				
By: ________________________________
				    Thomas W. Hammond, Jr., Chairman






A true copy,

Attest:  __________________________________
	    Clerk of the Board

		

 A subsidiary issue in this appeal was whether the Commissioner improperly assessed interest upon the unpaid penalties accrued by the appellant.  The Board found and ruled that the Commissioner imposed additional interest on the unpaid penalties assessed to the appellant, without the statutory authority to do so.  See Commissioner of Revenue v. Molesworth, 408 Mass. 580-581 (1990).   Accordingly, the Board issued an Order Under Rule 33, calling on the parties to compute the amount to be abated.  Following the calculation agreed upon by the parties, the Board ordered a partial abatement of $4,644.98.  The appellant's liability, after partial abatement, was $503,653.52.  
 Although both parties argued the case under the "reasonable cause" standard found in G.L. c. 62C, § 33(f), G.L. c. 62C § 34 allows the Commissioner to abate the penalty imposed by that section, in whole or in part, for "good and sufficient cause."  The Board, like the parties, looked to the analogous "reasonable cause" standard found in G.L. c. 62C, § 33.  

ATB 2008-1282